We've seen this movie before. A biotech falls flat on its face, its flagship drug getting rejected by the FDA just in time for a financial crisis. Bob Duggan takes over in the middle of the crisis, pours money into the company, and sells it seven years later for $21 billion.
This was the story of Pharmacyclics in late 2007. Xcytrin, an oncology drug, was rejected, but its second try, Imbruvica, was approved, and now sells $3.6B (page 31) annually for AbbVie (ABBV) and climbing. Pharmacyclics was a penny stock when Duggan took over, selling to AbbVie for over $260 a share.
Rearview investing is a soul-sucking venture. Could'a should'a would'a, etceter'a. All we can do is learn from mistakes and adapt. Can it happen again? If anyone knew for sure, they wouldn't be investing. It would just be taking a trip to the ATM. But history may be repeating. It won't repeat exactly and Duggan probably won't strike gold again in AbbVie magnitudes, but his new venture is at least well worth paying attention to for the possibility of perfectly respectable gains.
Pointed out astutely by SA contributor Hindenberg Investment Research, Pulse BioSciences (NASDAQ:PLSE) fell flat in September 2017, withdrawing its application for 510K clearance from the FDA for its PulseTX System for soft tissue ablation. It couldn't come up with the necessary data on cancerous tumors in time. That same month, Duggan swooped in with $30M in a private placement and helped refocus the direction of the company, becoming its Chairman two months later. Now Pulse's flagship system is rebranded CellFX, and the target indications are specific, aesthetic, not as "sexy" as a cancer zapper but addressing important markets, nonetheless. And with much more success, so far at least.
The concept behind the CellFX system is to overload cells with electricity at thousands of volts for 100 nanoseconds at a time, about one-ten-millionth of a second. The extremely short time frame accomplishes two main objectives. First, it doesn't burn the targeted cells or even heat them, much less the surrounding area, minimizing cosmetic damage. Second, and really the main point, is that it takes a microsecond, 10x longer than 10 nanoseconds, for charged ions floating around in the cytoplasm to rearrange themselves and block an electric field from penetrating to the organelles of the cell. Negative ions move to the positive end and vice versa, preventing the field from penetrating inside, thereby keeping the cell alive. But apply enough current for a shorter time than it takes ions to move across the cell and the current can get inside the cell itself and kill it. All the while cosmetic damage is minimized.
Since data came out in January on sebaceous hyperplasia showing 221 of 222 facial lesions cleared in 74 patients with a 78% satisfaction rate, the stock has begun to show signs of life.
Data by YCharts
For an idea of what this condition looks like, here is the Google Images page. A less scientific nomenclature could label these things as "megazits". They are the result of engorged sebaceous glands, similar to standard acne but worse. According to a Pulse Therapeutics-sponsored clinician survey, the condition affects about 4.3M patients in the US. You can choose to take that with a grain of salt, but for obvious reasons, it makes plenty of sense for a company to research its potential markets before investing significant resources into addressing them.
The other indication with substantial data is seborrheic keratosis, the most common of benign tumors. This condition is ubiquitous, affecting 83M Americans, meaning they have at least one of these somewhere on their bodies. Not all of them are going to be treated obviously, but around 43% who see a dermatologist for the condition end up being treated. So far, 58 patients with a total 174 lesions have been treated with 78% satisfaction and 82% clearance. No adverse events were recorded. Zero, meaning not even reports of post-ablative pain. Even if say 20% fail treatment, it's not much of a risk to take and just try it out.
Pulse has yet to report on a trial of CellFX for warts this quarter. Warts are the result of an HPV infection. My not-yet-two-year-old daughter has had these things chemically burned off 6 times, necessary because otherwise they spread. This is painful and traumatic for a person that size, nurturing within her tiny mind a deep loathing for all things doctor-related. A less painful electroablative alternative would certainly be appreciated. Another trial for acne vulgaris is due next quarter.
The need for more solutions that are not topical creams that need to be repeatedly applied or systemic oral therapies that can have off-target effects is becoming more apparent. This is especially true of antibiotic treatments which are becoming dangerous in needlessly encouraging antibiotic resistance.
At this point, there seems little doubt that CellFX pulse will obtain 510(k) approval for at least sebaceous hyperplasia and seborrheic keratosis, and possibly warts and acne, though we'll see by later this year or early next. The main question is how big these markets actually are and whether Pulse can successfully reach them. True, the market for seborrheic keratosis is quite small, but most cases are just not treated because the negatives outweigh the benefits. Make treatment easier and that market could grow. The big markets though are in warts and acne. The US acne market is about $8B, so here we're talking about much more serious numbers.
The marketing plan is to target key opinion leaders first and market CellFX on a utilization basis. Essentially, that means renting out the product as a service connected to an app instead of charging dermatologists the entire capital value. It makes trying out CellFX mostly riskless for private practices, encouraging faster adoption.
I'm not predicting another multi-billion dollar buyout here. I'm merely pointing out that while aesthetic indications don't attract oodles of attention (wart cures don't exactly make headlines), there are significant revenue opportunities here and they could start to add up for Pulse while few pay attention, chasing more exotic animals than pimples, warts, and benign tumors.
The 510(k) pathway is very cheap and quick compared to full-blown Phase III trials, Pulse having only lost $75M since inception in 2016. A two plus year cash runway at current burn rate, a marketing plan in place, and Duggan backing development could see shareholders rewarded handsomely as the 2020s approach.
